Macro Chapter 7 (GDP)
Total Factor Income
The sum of all factor incomes and nonfactor payments. Payments for intermediate goods are not part of it (sum of wages, interest payments, rent and profits)
Growth rate of nominal GDP equation
(Nominal GDP Year 2 - Nominal GDP Year 1) / (Nominal GDP Year 1) x 100%
Growth rate of real GDP
(Real GDP Year 2 - Real GDP Year 1) / Real GDP Year 1
Difference when calculating nominal GDP vs real GDP
To estimate the true increase in a products output produced, we have to ask: how much would GDP have gone up if prices had not changed? Real GDP is the quantity multiplied by the prior year's prices
Value added equation
Value Added= Finished Goods - Raw Materials ALSO Value added = sales - cost of intermediate goods used
Price index formula (in a given year)
(cost of market basket in a given year) / (cost of market basket in base year)
Inflation rate equation
(price index in year 2 - price index in year 1) / (price index in year 1)
Things that would NOT be included in calculating U.S. GDP
- GM's assembly and sale of cars in Mexico - resale of used textbooks to college students - sale of wheat to Mrs. Baird's Bakery - Ocean Spray purchases plastic to make bottles
Things that would be included in calculating U.S. GDP
- Honda's assembly and sale of cars in the U.S. - Old Navy purchases mannequins to display clothes
Included in GDP
- Investment Spending - Capital Spending - Domestically Produced final goods and services
What GDP tells us
- Measures the size of the economy - One must be careful when comparing economies over time. That's because increases in GDP over time might represent increases in prices rather than increases in output - We need to adjust DDP for price changes--we need real GDP
NOT included in GDP
- Spending on intermediate goods and services (inputs) - Used goods - Financial assets like stocks and bonds - Import spending (goods and services produced outside the country)
Real GDP per capita is an adequate measure of...
- average real GDP per person in the economy. the well-being of each person in an economy. - a country's average aggregate spending per person. - a country's average aggregate output per person. - does NOT measure well-being of each person
Inflation rate
- the annual percent change in an official price index. - the percentage change per year in a price index, typically the consumer price index.
At a coffee shop, what is not considered to be a final good?
- the whipped cream put on top of the coffee drinks - the flavored syrup added to coffee drinks - the coffee beans used to make the coffee
GDP Variables
C = Consumer Spending I = Investment Spending (Businesses) G = Government purchases of goods and services X = exports / sales to foreigners IM = imports
To MEASURE GDP as factor income earned from FIRMS in the economy....
Find the SUM of all the wages (W), rent (R), profit (P), and interest (I) in the economy.
GNP
GDP + Net Factor Income Abroad
Calculating GDP
GDP = C + I + G + X - IM
The _____ for a given year is 100 times the ratio of nominal GDP to real GDP in that year.
GDP deflator
What is often used to compare output across countries with different populations?
GDP per capita
GDP per capita equation
GDP/population
CPI equation (consumer price index)
[cost of market basket (year x) / market basket base year] x 100
At a coffee shop, which is considered to be a final good?
a coffee drink purchased at the counter
A price index
a normalized measure of the overall price level
If the percent change in GDP is the same as percent change in population, the GDP per capita...
does not change
In the circular-flow diagram of the economy, households can use their income to pay taxes, as well as to purchase:
goods and services and engage in private saving
An increase in inventories leads to a(n):
increase in investment spending, and an increase in GDP for the time period if nothing else changes.
inputs
intermediate goods
GDP is like annual income...
it measures a rate of production during a given period
producer price index
measures the changes in the prices of goods purchased by producers
To calculate the real GDP for year 1...
multiply the price in year 2 by the quantity in year 1 for both product 1 and product 2, then take the sum.
To calculate the value of a market basket:
multiply the quantity of the market baskets by the price of the baskets for that year.
The difference between spending on inputs and investment spending is that:
spending on investment goods is included in the calculation of GDP.
The aggregate price level is a measure of...
the overall level of prices in the economy
Notice that if the base year for real GDP is year 2...
the real GDP and nominal GDP in year 2 will be equal.
GDP (Gross Domestic Product)
the total market value of all final goods and services produced within a country in a year (sum of factored income)
Spending = Income:
It doesn't matter HOW we measure the production, since one person's spending is another's income.
Inflation rate problem process
Market basket formula, price index formula, inflation rate formula
Rich is better
Richer countries on average have a higher well-being than poor countries.
What is a scenario that provides the best evidence that inflation has occurred?
A person whose salary has increased can purchase fewer goods and services.
Money matters less as you grow richer
As GDP rises, the average gain in life satisfaction per extra dollar gets smaller and smaller.
Money isn't everything
A good percentage of the essays address a more universal truth: that money is not everything. Yes, it is needed to survive, but it is not a requirement in making people happy.
A market basket
A hypothetical consumption bundle, used to measure changes in the overall price level
The base period for the consumer price index is currently:
1982-1984
The U.S. consumer price index contains data from _____ different cities.
87
Nominal GDP
A GDP number that has not been adjusted for changes in prices. Calculated using the prices in the year in which the output is produced.
Why is a hypothetical basket of goods used to measure inflation?
Consumers can see the general increase in price over time by using a basket of goods.
